by Greg Valliere, AGF Management Ltd.
AN ASPIRATIONAL WISH LIST: The Covid relief bill enacted earlier this month was an easy battle compared to the next chapter — a mammoth infrastructure spending package, combined with tax hikes, that President Biden will propose within days.
NOT ONLY WILL THE PRESIDENT encounter virtually unanimous opposition from Republicans if this is sent to Congress in one package — he will face resistance from moderate Democrats, who have little stomach for a $3 trillion spending blowout.
THE MOOD ON CAPITOL HILL is clear — the U.S. economy is poised to surge, and perhaps even over-heat, in the coming months. Another huge stimulus bill, our sources believe, would please only the progressives; most members of Congress see a looming campaign issue for Republicans.
DETAILS OF THE NEW BIDEN PLAN leaked out yesterday. Much will depend on whether this new plan is divided into separate bills or sent to Congress as one mammoth package; the latter option would make it even more difficult to pass. Here are some quick highlights of the plan:
THE PRICETAG COULD HIT $3 TRILLION, some of it spent out over ten years, some of it more immediate. The centerpiece will be a huge upgrade in infrastructure spending — highways, bridges, telecom, 5G networks, housing, retrofitting buildings and gas stations to comply with new Green standards. “Low carbon emissions” is the mantra.
Also in this first component will be a boost for U.S. manufacturing infrastructure
as Biden and Congress agree on combatting Chinese imports — a major selling point for the overall bill.
THE SECOND PART OF THE PACKAGE WOULD MAKE PERMANENT child tax credits, health insurance subsidies, and education spending including free community college, universal pre-kindergarten and free or reduced tuition at historically Black colleges.
REVENUE RAISERS: Still another major component of this bill will be tax increases on corporations, rising from 21% now to 28%. Biden has a chance to get the rate up to 25% or 26%, along with tax hikes for individuals earning more than $400,000 annually. Democrats will argue that the public favors these tax increases, as well as tax hikes on “the rich” for capital gains and estate taxes. Republicans will vehemently oppose tax increases.
ALSO TUCKED INTO THE BILL will be sharp penalties for drug companies that don’t lower their prices, which proponents say would save the federal government billions by lowering the price of prescription drugs.
BOTTOM LINE: With no Republicans in support and many moderate Democrats uneasy, something as ambitious as this proposal will have to be watered down if there are traditional negotiations. If Biden’s allies attempt to ram this bill through via the reconciliation process, some moderate Democrats may balk.
THIS WILL BE A MAJOR THEME: Moderate Democrats against Progressive Democrats. The latter want to cut defense spending, enact a tough new gun background law, make the District of Columbia a state, etc. They probably will fail to get these proposals enacted, and they will have to accept an infrastructure bill that costs well below $3 trillion.
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JANET YELLEN TODAY: Press reports indicate that the Treasury Secretary may indicate in testimony before Congress that the U.S. economy could reach full employment in 2022. Readers know that we’ve been predicting that full employment could come even sooner, perhaps by late this year.
A QUESTION PERSISTS: If we’re at full employment by next year, how can the Fed not consider becoming less accommodative, perhaps looking at its level of asset purchases? A rate hike is a long way off, but a subtle shift in asset purchases may be on the table by the end of this year.
